Tax Learning Center

Cost Basis Learning Center

What is cost basis?

Cost basis is the value or price that you paid for a security plus any commissions. If the security experienced any corporate events, such as splits, spin-offs or dividend reinvestments, during the time that you owned your shares, then your original cost and shares must be adjusted for these actions. For example, you purchased 200 shares of ABC Company 2 years ago for $25 per share for a total original cost basis of $5,000. A year after you purchased those shares, the company underwent a 2:1 split (which means for every one share you originally owned, you now have two), so you now have 400 shares. To calculate the adjusted cost basis per share, you divide the original cost basis ($5,000) by the new number of shares (400), and your adjusted cost basis per share is now $12.50. Your shares doubled but the cost per share went down because you are spreading your original cost basis across twice as many shares after the split.

What are capital gains/losses?

The capital gain or loss is the difference between the market value of your stock and the adjusted cost basis. When you sell a portion or all of your security, you must report your capital gains on your tax return. For example, five years ago, you purchased 100 shares of XYZ Company at $10 per share, which means your original cost basis was $1,000. The price of the company increased to $20 per share and you want to sell all of your shares. You would subtract the original cost basis of $1,000 from the new value of your shares which is $2,000. The difference of $1,000 is what has to be reported as capital gains. If the new value of your shares had gone down to $5 per share, then the difference would be $500 which would be reported as a capital loss of $500 from the original cost basis of $1,000.

New cost basis requirements that became effective January 1, 2011 mean that taxpayers are ultimately responsible for the accuracy of the cost basis figures reported on their Schedule D. So, if your Schedule D is audited and the IRS finds a misreported amount, you are ultimately responsible and face possible fines, even if your broker provided you with the figure in question! Prudent investors can double check the cost basis reported by their brokers using Netbasis, the professional and accurate cost basis solution.

Can your Schedule D pass an IRS audit?

With new regulations that came into effect on January 1, 2011, the IRS is now focusing on the accurate reporting of gains or losses on the sale of stock. Taxpayers are now required to accurately report on a Schedule D the adjusted cost basis used to calculate the capital gain/loss. If you sold stock last year, the IRS may pay extra attention to your Schedule D to make sure that you accurately reported your cost basis. Are your cost basis figures accurate enough to pass an IRS audit? If you aren’t sure, calculate your cost basis with NetWorth Services’ Netbasis, the recognized and trusted cost basis solution.

What is a wash sale?

A wash sale is an illegal strategy or series of transactions where an investor simultaneously purchases and sells shares of the same company, usually through different brokers, in order to create the illusion of a tax loss without really giving up their position in that security. With the enforcement of the IRS Wash Sale Rule, which states that an investor cannot report a loss on an investment that was purchased 30 days before or after the sale, the IRS quickly eliminated the effectiveness of the wash sale strategy.

How can I get my cost basis?

Typically, investors calculate the cost basis themselves using years’ worth of brokerage statements and a calculator. This can be a complex, confusing and complicated task; and the longer the holding period for the stock and the more complicated its corporate history, the greater the risk of an inaccurate end result. However, there is an easier way. Use Netbasis, the simple and trusted solution that calculates cost basis for even the most complicated of holdings.

Are my other investments affected by the cost basis regulatory changes?

Because EESA’s requirements are being rolled out in three phases, the following securities will be affected as follows: January 1, 2011 – Equities; January 1, 2012 – Mutual funds, stock acquired in a dividend reinvestment plan (DRIP) and electronic funds transfer (EFT’s); January 1, 2013 – Fixed income and options.

How does the new cost basis legislation affect me?

Investors must be aware of how the new cost basis legislation will affect them. In 2008, Congress passed the Emergency Economic Stabilization Act (EESA), the so-called “Bailout Bill.” Included in the bill are cost basis provisions which require that beginning January 1, 2011, brokers and other financial intermediaries must provide their customers with the cost basis of “covered securities.” Covered securities are those purchased on or after January 1, 2011. “Uncovered securities” are those purchased before January 1, 2011. You need to be concerned about your uncovered securities. Brokers and other financial intermediaries are not required by law to report the cost basis for uncovered securities. If your broker does not provide the cost basis for your uncovered securities, you will need to calculate the cost basis yourself. The new regulations also mean increased fines for underreporting capital gains. You, as the investor, are ultimately responsible to the IRS for ensuring that capital gain and loss amounts are correct; and as a result, it is very important that your cost basis calculations are exact.

Schedule D Learning Center

What is Schedule D?

Schedule D (Capital Gains and Losses) is the IRS form that reports the capital gains and losses for that tax year as a result of stock sales.

Has the Schedule D been revised for the 2011 Tax Year?

Yes, the IRS released a revised Schedule D form to coincide with the release of the new Form 8949. Both new forms were generated because of the new cost basis law that requires brokers to report the basis of stock sold on the Form 1099-B for stock purchased after December 31, 2010. A sample of the revised Schedule D is available at http://www.irs.gov/pub/irs-pdf/f1040sd.pdf.

How can I learn more details about the revised Schedule D?

You can access more information about the current revised Schedule D for taxpayers at www.irs.gov/draftforms, and click on “Inst 1040 Schedule D.” It clarifies how to properly calculate and report your gains and losses on the 8949 and Schedule D Forms.

8949 Learning Center

What is Form 8949?

The IRS has released the new Form 8949 (Sales and Other Distribution of Assets) to be used for 2011 tax returns. All capital gains and losses will be reported on this form.

Why did the IRS release this new form?

The IRS released Form 8949 to coincide with the new cost basis law that requires brokers to report the basis of stock sold on the Form 1099-B for stock purchased after December 31, 2010.

The following are examples of the new fields on Form 8949:

Transaction type checkbox – This is to classify whether or not basis is reported on Form 1099-B or a Form 1099-B was not received. The Schedule D has been changed to report the total short-term and long-term gain or loss from the three transaction types that are reported on Form 8949.

Code field (column b) – This will be used to identify the type of capital transaction it is if an adjustment is required in the new adjustment field. An example would be if a basis is reported on 1099-B for a stock sale and the taxpayer disagrees with that basis. The basis reported on Form 1099-B would be reported on Form 1099-B column f and an adjustment would be shown in column g to reflect the actual basis the taxpayer has in their records.

Adjustment field (column g) – This is for reporting the difference in basis for stock sales and other transactions such as the exclusion of gain on sale of main home, wash sales, disallowed/nondeductible loss transactions, etc.

Schedule D is now only used after you have calculated and reported all capital gains and losses reported on the various applicable forms and to calculate the total net capital gain or loss for the year.

How can I learn more details about the new Form 8949?

The IRS has issued Publication 544 as an explanatory reference for taxpayers (www.irs.gov/draftforms, and click on “Inst 1040 Schedule D). It clarifies how to properly calculate and report your gains and losses on the 8949 and Schedule D Forms.